Algos and Coronavirus
For those at quant funds or who know them. How often or carefully do these adjust algos get adjusted to not over-respond to data that’s already priced in? Obvious example would be new jobs report coming out soon. Everyone knows it will tank for Covid. Market has already traded ahead of that, at least to a large degree. So if algo is ordinarily programmed to sell on a typically weak jobs number, obviously it loses its shit when an outlier is plugged in. Would seem dumb to just let that happen so wondering what kind of common sense adjustments are made? Thanks
I don't have any substantive knowledge on the topic, but don't a lot of quantitative funds still have discretionary execution? So signals would be going off but it's up to the trader to pull trigger on positions? I could be off there but that would obviously mitigate that problem.
That's what I figured. I heard a lot of chatter last night that the algos would have a heart attack when the official data comes in. I think a lot of the discretionary overlays will prevent that. But maybe still a shred of truth to the theory, since I have my doubts about how level-headed those traders are.
From what I know, should be completely fund dependent. Or even different across different teams within the same fund.
I suppose the process of quant researchers developing models to extract insights and make predictions and giving off the models to the quant traders is pretty universal.
But depending on specific investment strategy and technical prowess (the number and the capability of your engineers), trade decisions can be fully automated, semi-automated, or completely trader dependent.
If your model outputs include, price, volume, and exact timing of the order (could be absolute like " 2pm this Friday" or relative to market events "when gold falls below $x") and the exact timing really really matters then why not automate? If the exact timing isn't that important, why even bother to automate? Somewhere in the middle? Who not automate some parts but not all.
One more point.
Higher frequency you are, more automated you are. It'd be crazy not to right?
To actually answer your question:
From the best of my knowledge, aggregated from close friends who are quants, my own experience working closely with quants, and quantitatively managing my own small personal account, there are couple ways. But they completely depend on your strategy. Not all quant funds are the same just as not all non-quant funds are the same.
One way of mitigating such outlier situations like COVID is to just look at the numbers and not give two shits about what's actually happening in the real world. Volatile markets are volatile no matter the cause. Good quants understand how to appropriately characterize market conditions and how to model them. If you do this right, you don't care what the causes are. You just know that patterns exist and if you've made the right assumptions, used the right data, and made your models the right way, any anomalies like COVID aren't actually anomalies. You've seen similar things happen to the market before. For example, this is Renaissance Technology's bread and butter. Depending on the underlying principles of the fund, some may automate trades (traders get to build these automation modules). RenTech wants 0 human judgement on the trade decisions so they automate.
Another way is to model out the anomalies and their impacts. This is really for Global macro + quant type funds like Bridgewater, one that really cares about what's happening in the world and not just the numbers. These guys are more likely to leave trading discretionary. Human judgement plays a big part for them.
There actually is a third way. Stay market neutral. That might be difficult in practice but you can surely pick strategies whose profitabilities are not affected by market conditions.
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